FR12/2016 Statement on implementation of new accounting standards

STATEMENT ON IMPLEMENTATION OF NEW ACCOUNTING STANDARDS Final Report THE BOARD OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR12/2016 December 2016 2 I. Introduction The International Organization of Securities Commissions (IOSCO) objectives of securities regulation are protecting investors; ensuring that markets are fair, efficient, and transparent; and reducing systemic risk. One of the IOSCO Principles of Securities Regulation for issuers (Principle 16) is that there should be full, accurate, and timely disclosure of financial results, risk, and other information which is material to investors’ decisions. IOSCO considers the accuracy, integrity, and comparability of issuer disclosure to be essential for maintaining investor confidence and therefore facilitating a stable international financial system. IOSCO is accordingly issuing this Statement, based on and in light of the following: • The International Accounting Standards Board (IASB) issued three new International Financial Reporting Standards (IFRS) which relate to revenue, financial instruments, and leases (collectively, the “new standards”). These new standards are likely to significantly affect the financial statements of many issuers given the financial statement line items affected and the prevalence of transactions within their scope; 1 • Issuers have already commenced or will soon commence the work necessary to implement the new standards; audit committees are engaged in oversight of issuers’ implementation processes and, similarly, their auditors are planning their work to perform the audit procedures thereon; and • IOSCO Principle 16 and the IFRS Standards emphasize the need for transparent issuer disclosures relevant to assessing the possible impacts of adopting the new standards and providing investors with timely and decision-useful information.2 Issuers, including their audit committees, and auditors will each play a critical role during the implementation of the three new standards. II. New Standards The new standards are likely to significantly affect the financial statements of many issuers globally given the breadth of their applicability, in terms of number of jurisdictions and issuers affected, as well as the prevalence of the transactions within their scope, as highlighted below. 1 IFRS 15, Revenue from Contracts with Customers, and IFRS 9, Financial Instruments, are effective for annual periods beginning on or after 1 January 2018. IFRS 16, Leases, is effective for annual periods beginning on or after 1 January 2019. However, an issuer’s adoption of the new standards may be affected by jurisdictional decisions regarding either adoption or effective dates. 2 See IOSCO Objectives and Principles of Securities Regulation: Principle 16 and see IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 30 and 31. 3 Revenue from Contracts with Customers The new revenue standard provides clearer and more detailed principles for revenue recognition and disclosure in a framework that is designed to improve comparability of revenue amounts over a range of industries, companies, and geographical boundaries. The standard can significantly change an issuer’s timing for its recognition of revenue, among other changes. Revenue is often not only a key performance measure in its own right but also the starting point for other performance measures, such as operating income, net income, and earnings per share; key analytical ratios such as margins, return on equity, and return on assets; and valuation metrics, such as revenue multiples and price-to-earnings ratios. As a result, the new revenue standard has the potential to change not only an issuer’s top line, but also its bottom line and investor analyses that depend on the financial statements. Financial Instruments The new financial instruments standard introduces changes to the accounting for credit losses, including the related disclosures. The new financial instruments standard also introduces changes to how financial assets are measured on an ongoing basis to align with the asset’s cash flow characteristics and the business model in which the asset is held. The new standard was developed in response to concerns of many investors and other stakeholders, both during and after the global financial crisis, that there needed to be more timely recognition of expected credit losses for loans and other financial instruments. In measuring expected credit losses under the new standard, issuers will be required to use reasona